China: The Hammer Falls On BOPP

Biaxially oriented polypropylene (BOPP) films capacity in China has risen to three times the country’s annual demand, said a source with a global polyolefins producer.

Watch this space for the actual data as this is still work in progress. But suffice to say here, the initial numbers we have been given would be shocking if they were only half true.

Why has this happened?

Because investors in BOPP fabrication facilities were not really interested in the films business. Instead, they wanted to get hold of loans to speculate in real estate.

This appears to have worked in one of several ways:

They used the cash flow from selling BOPP film to invest in the shadow-banking system, where interest rates could be as high as 60%. This money ultimately found its way into real estate. They were often losing money on each tonne of film they sold, but this didn’t matter because the returns from shadow banking more than compensated for these losses.

They used the cash flow to complete their own property deals, as many of these converters doubled as real-estate developers.

BOPP film lines take up a lot of land. So the idea here was to build a film line, operate it quite possibly at a loss for a few years, then knock it down and sell the land, by which time the land would have appreciated in value because of the real-estate bubble.

Phase one of this crazy process involved borrowing money domestically to fund these plastics fabrication facilities.

And then, three years ago when the government tried to take some of the air out of the property bubble by restricting loans to the real-estate sector, phase two kicked in: Borrowing money overseas, which had the added advantages of lower interest rates and the chance to make money on the appreciation of the Yuan.

It seems to be no coincidence, therefore, that much of the overcapacity in BOPP appears to have occurred after 2011.

All was well and good as long as China’s government pretty much acquiesced to this distortion of long-term economic reality.

No longer. The hammer has fallen on the BOPP films industry as the government continues to play its “whack-a-mole” game.

BOPP films producers are being starved of working finance, and are thus are being forced to shut down, as in parallel their real-estate investments go bad whilst the property bubble is deflated.

“You cannot speculate in the property market in this way anymore and so plants are shutting down. In some cases, the bosses of these factories are running away,” added the source with the polyolefins producer.

Chemicals companies need to take this example on board and consider whether:

Other chemicals and polymers might have been the subject of similar downstream capacity distortions.

Chemicals imports have also become tied-up in the real-estate game through “collateral trading”. This could have significant implications for the real – as opposed to the apparent – demand growth in polyethylene and mono-ethylene glycol.

The unwinding of these imbalances across the whole of China’s economy represent a major global macro-economic risk. More on this last subject tomorrow.